Guest Post: Social Security Has A Real Problem

The Social Security Administration made an alarming announcement recently that they will exhaust their funding capability by 2033 which was several years earlier than originally projected. According to a recent article from Reuters: "Unless Washington politicians, who have been at war with each other over government spending priorities and federal budget deficits, can decide how to put Social Security on a sound footing, retirees' pension checks would start running out in 2033, according to an annual report.

The baby boomers - those 78 million Americans born between 1946 and 1964 - started retiring last year. With 10,000 of them expected to retire every day for the next 19 years, according to the Pew Research Center, they will increasingly strain Social Security."

As millions of baby boomers approach retirement more strain is put on the fabric of the Social Security system. The exact timing of this crunch is less important than its inevitability. The problem that Social Security has is "real" employment. I say "real" employment simply to sidestep the ongoing arguments about the validity of government employment survey's from the Bureau of Labor Statistics. The question we want to know is if we are creating jobs and what types of jobs are we creating? The answer to those questions tells us much about the strength of the underlying economy.

The Federal Government receives income from the Social Security "contribution" from employee's paychecks. The chart above shows the annual levels of employment as reported by the BLS versus the receipts of social security contributions. As you can see while there has been a negligible increase in the number of non-farm employees - social security "contributions" have decreased sharply by almost $70 billion from its peak.

This is due to two factors. The first is that the number of "real" employees, while growing, is in lower income producing and temporary jobs. Since social security contributions are calculated as a percentage of income - lower income levels produce lower contributions. We have written about this previously on the "real" employment situation. However, in a recent interview Richard Yaramone spoke specifically to this issue stating "I'm fortunate enough to travel and speak to chambers of commerce with 300 to 500 people in the audience. They all tell me, 'Hey, listen, I am letting go of workers. I'm hiring them back at a fraction of what I used to pay them. You hear from the other side, 'Hey, I finally got a job after two years of being unemployed. I used to make $100,000 (each year), now I'm making $45,000 or now I'm working part time.' Or (you hear), 'I used to make $500,000 and now I'm making $200,000 or making $125,000.'...."

Here is the key statement and something that we address often in regard to the NFIB survey's: "So you are actually seeing this collapse, contracting on a real basis, of real disposable personal incomes. If you don't have the money, you can't facilitate expenditures. So that's the core of the problem. That's what's really going on in the US economy. You don't listen to what all of these bigger numbers coming across the screen tell you. You talk to the people who are running the country. 99.7% of all employer firms in this country are small businesses. So when they speak, you have to listen."

The second factor is that a larger share of personal incomes is made up of government benefits which does not affect social security contributions. The chart tells the tale in this regard. Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%. This also does not include the 45 million plus Americans also collecting nutritional assistance, or "food stamps", from the government.

The dependency upon government for financial support is a long term economic problem because it reduces economic prosperity. However, the problem that Social Security faces is that the program's annual cash surplus continues to shrink due to lower receipts from working American's. The problem for Social Security, and the U.S. in general, comes long before 2033. In 2017 or 2018, just 5 to 7 short years from now, Social Security will begin paying out more in benefits than it receives in taxes. It could come even sooner. As the cash surplus is depleted, which is primarily government I.O.U.'s, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will then need to consume ever-growing amounts of general revenue dollars to meet its obligations--money that now pays for everything from environmental programs to highway construction to defense. Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security.

As millions of baby boomers begin to retire another problem emerges as well. Demographic trends are fairly easy to forecast and predict. (My friend Doug Short has done some excellent work in this area) Each year from 2008, when those born in 1946 reach Social Security's early retirement age of 62, until 2025 we will see successive rounds of boomers reach the 62 year-old threshold. There is a twofold problem caused by these successive crops of boomers heading into retirement. The first is that each boomer has not produced enough children to replace themselves which leads to a decline in the number of taxpaying workers. It takes about 25 years to grow a new taxpayer. We can estimate, with surprising accuracy, how many people born in a particular year will live to reach retirement. The retirees of 2070 were all born in 2003, and we can see and count them today.

The second problem is the employment problem. The decline in economic prosperity, that we have discussed extensively, caused by excessive debt, reduction in savings, declining income growth due to productivity increases and the shift from a manufacturing to service based society will continue to lead to lower levels of taxable incomes in the future. Furthermore, with unemployment in the U.S. remaining stubbornly high, the longer that all-important 25-35 year old person remains unemployed the related loss in relevant job skills leads them to becoming unemployable.

This employment conundrum is critical. Back in 1950, as the baby boom was just beginning to start, each retiree's benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach--and remain at--about two workers per retiree. Each married couple will have to pay, along with their own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut. The chart shows this relationship between social benefits paid out in total (including social security, Medicaid, Medicare, etc.,) and the burden upon each non-farm employee. Back in 1966 each employee shoulders $555 dollars of social benefits. Today, each employee has to support $17,387 of benefits. The trend is obviously unsustainable unless wages or employment begins to increase dramatically and based on current trends that seems highly unlikely.

The entire social support framework faces an inevitable conclusion and no amount of wishful thinking will change that. The question is whether our elected leaders will start making the changes necessary sooner, while they can be done by choice, or later when they are forced upon us.

Go ahead and means test people who have saved nothing and have no pension. They will be collecting $12K-$20K a year and that will be their entire income. You want to tax them? Well, what do you think the tax will be on your $50K to $100K wage?

the u.s. goverment has all the money it wants. as sec. of the treasury i have this day ordered treasury employees to direct deposit all soc. sec. payments direct into all retires' checking accounts. these payments are created out of thin air, at a computor keyboard just like the federal reserve creates money out of thin air and at no cost. these payments will be considered a no cost solution to the generational ponzi scheme called soc. sec. payments into and by current workers to fund soc. sec. will continue ,however those reciepts will be used to pay down the debt of the united states. these actions are by executive order by the president of the united states and require no approval by congress.

Bingo, they will mean test like crazy and make it a crime to hide assets while doing this for SS. And heaven help the people getting disability via the SS, they may send you to federal prison aka "camps" for defrauding them if something doesn't fit. Maybe this will explain why 450 million hollow point bullets where bought by the DHS (dept of homeland security).

They may be getting ready for the inevitable cuts in benefits and such.

... but ... but ... it was an "investment"! Those who put in will want it all back, plus interest. Those who didn't put [much] in will still want a full benefit (and will probably pass the "means" test, too)!

I love it when an ill conceived government ponzi scheme clashes with its own faulty labor statistics. It's like two morons meeting in the middle of a busy highway and getting run over! Darwin at its finest!

No, no no. You gotta think outside the box. DECREASE the age to 50, but require anyone accepting benefits prior to 87.5 sign a life insurance policy payable to the US Gov in order to receive benefits. They should be able to bundle those up, derivitive the shit out of them and get us at least another 10 years of prosperity before we have an "accidental" water poisoning at state-run nursing homes nationwide.

True in some cases it is taxable but that just goes to bailing out banks, food stamps, and keeping the postal service running. They need a direct way to keep ss running, They should just create a SIV for social security and have the fed buy it or give banks money to buy it.

That would be mostly the race hustling party, the party of the Old South, of Jim Crow, of segregation, of the KKK, of violent resistance against civil rights movement.

They converted over to the new racism a little while after losing the civil rights fight(their yes votes were embarrassingly low in both chambers of Congress), and converted the party of positive discrimination, race hustling, but changing anything on this note:

they are now and have been since FDR's first race pandering in the FDR Depression, the party of identity politics.

Actually FDR predicted this outcome back when they were doing the calculations as to its viability, that someday, as soon as 1980 back when they did the math, the system would become a giant burden to the young.

It already has been, as people on this site will understand, it has sucked out something like 13% of their potential wages throughout their careers, for most of them, and will not, cannot be paid back.

It has gone to current expenditure all along. Poof. Worse than the spoof about Wall Street investing.

I remeber a few year back watching some 60 minutes special (I think) on SS and they actually do keep all the bonds/ IOU's on paper in binders - none of it was electronic - fire in nondescript office building and trust fund goes bye bye

Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%. This also does not include the 45 million plus Americans also collecting nutritional assistance, or "food stamps", from the government...

Very true. Dad was visiting last weekend, just retired this year, and he was helping with fixing up the house. Little stuff, nothing major. He kept telling me really basic stuff until I finally said I'm a fucking doctor not a retard. He said he was sorry, he just wasn't around when I was younger to teach me any of this stuff (he abandoned the family before I can remember). I said it's okay, life isn't all parades and birthday parties. It was very touching almost like a Hallmark ad.

Just one of the many little ways I get to tell the powers that be to fuck off. You better believe they hate any type of reconciliation between generations.

Unbelievable that the author of this article does not discuss the payroll tax cut which funds the friggin system. Less money going in to the system. Gee, guess what happens? The insolvency date gets closer.

Cut benefits across the board and let the grasshoppers deal with it. We ants want our fair share!

Comment:

I agree with you. Though I would say cut benefits to zero. The big question is, what is the cut off age. I know I have paid in and will probably never see a dime. Unfortunately, life isn't always fair. I would gladly give up what I have contributed if I could stop contributing right now and invest it myself with my own account that no one could touch (though I'm sure congress would tax me even more to death.)

Hate to break it to you, but the check will be in the mail. The political class responds to the votes. A large cohort of aged boomers have the votes. Every boomer I talk to liberal, conservative or confused all agree, rabidly, they're getting paid. If there is anything that is clear about the future, it's that. Only a complete systemic breakdown would change this.

Yeap. That prediction relies on all kinds of rosy scenarios. Even if SS goes tits up in 10 years instead of just falling short in 20, the dollar will probably collapse before that so it is a mute point.

"As the cash surplus is depleted, which is primarily government I.O.U.'s, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will then need to consume ever-growing amounts of general revenue dollars to meet its obligations"

Methinks you don't understand what an I.O.U. is... it isn't cash on hand to spend. It's already been spent, a Treasury Bond put in its place (the aforementioned "I.O.U."). Aside from Obamacare, you cannot spend the same money twice by merely declaring the IOU to be "cash reserves". In order to convert that IOU to cash, it must be redeemed either out of (then) current tax revenue or by issuing a new bond to another sucker, er, buyer, and those procedes used to redeem the old bond and pay benefits (I suppose they could sell the not-yet mature bonds on the open market as well, and the Fed could always print the $ to buy them in an increasingly saturated market). Both options, by the way, being the same options available to the government if they'd never gone through the shell game of issuing itself IOUs in the first place and simply spent the money and worried about funding it later. Crazy, I know.

The bonds in the Trust Fund are called Special Issue bonds. They are non-negotiable Treasurys which can only be redeemed by the Treasury itself. Right now, Social Security is still in a positive cash flow when you include the interest paid into the Fund by the Treasury on these bonds, and when you include taxes on Social Security incomes of higher-income taxpayers. But this will not last forever and eventually Social Security will start to run in a net deficit. That is when the bonds in the Trust Fund will be presented to the Treasury for payment. They will have to be refinanced, as you point out, by issuing regular Treasurys at auction in order to raise these monies. And this is where I think the trouble will start, since this new supply will put pressure on the Treasury market and compound the overall fiscal situation of the Federal government--higher interest rates will cause higher government interest expense, and this will both have to be financed itself, or spending will have to be reduced in other areas accomodate it. The budgetary pressure will be extremely difficult. The easy way out will doubtless be pursued, since the problems are so large and intractable, meaning that the Fed will conspire with the Treasury (and Congress) and add billions of Treasurys to the Fed's balance sheet. This monetization will have awful consequences in the near future as it translates into inflation and a lower standard of living. Americans really have no clue what is going to hit them.

From about 1934 till 1957 my grandmother lived exclusively from renting boats and selling worms. There was a lot of family help getting the boats ready by Memorial Day and taking them out in September. The rest of the year she traveled ... from one kid to another until spring. She didn't live very high on the hog but she lived and we all helped. I cleaned boats and gathered worms for three summers.

Oh geez, you didn't get the memo. See, as the spin state of the earth flips time will be compressed. It has to do with our individual magnetic fields (we are all driven my electrical impulses after all) coupling with the overall magentic field of the earth. As this drifts towards anisotropy, time - as we perceive it, is compressed.

Or, they pulled these numbers out of their ass and now they switched the asses they pull the numbers out of.

"Nothing significant will be done until failure is only a couple of weeks away."

There...fixed it for you. (A couple of years is somebody else's problem).

No forecast, plan, budget, promise or action that is outside the current fiscal quarter is remotely believable (and even some within the current quarter are subject to "change due to unforseen circumstances", or "external factors").

The average baby boomer thinks something along these lines. They think they have $400k in their IRA ( SS fund) but they have $3 million in debt from boats, kids college educations they paid for, the vacation home, all those dinners out racked up on their credit cards, etc.

What they fail to understand is, all those gov't deficits that were rung up for the military industrial complex, bailout of the banks, war on drugs and whatever the hell else big gov't blew all them trillions on, that them SS checks are going to have to go to service the debt instead of paying for the bills.

My short S&P 500 position remains in play but is currently underwater. Rather than add additional shorts into strength i decided to keep my position sizing in order to reduce any more exposure to higher prices.

If we are due for a higher close on Friday i will exit my position at a loss and protect my capital.

So what happened to the money. After contributions were doubled under the Reagan Admin SS fix, that was supposed to build a large enough surplus to take care of all of the boomers. I think the plan was to also reduce the contribution rates after the boomers starting dying.

Granted contributions have decreased in recent years due to lower paying jobs and higher unemployment, but you have to wonder if the Social Security Admin used unsustainable economic growth rates in their projections. I've been contributing the full amount on both sides for over 3 decades, and want to see some return on my investment.

Like there is any money in there in the first place. We're 15 trillion in debt and someone is worried that SS will run out of money? We ran out of money a long time ago, and that includes the SS contributions that were looted and spent as well.

When they talk about two workers to every retiree in 2025, they are talking about chaos. You may as well send grandma and grandpa on a six week luxury cruise when they turn 65 and then put them out of their misery with a needle. It might sound shocking but the alternative might be even more shocking. The mathematics are just impossible to overcome even with all the goodwill in the world.

Separate the SS monies from the general funds as was intended originally.

Stop using the SS taxes that I and my employers have paid in on mine and others behalf to fund your goddamn wars, bailing out international banksters, and propping up Israel, Pakistan, House of Saud, etc.,etc....also known as 'foreign aid' or known to me as tax dollars(particularly SS money) subsidizing war profiteers, Zionist foreign policies, banksters, and corporate cronies.

And no I don't give a flying fuck that 'foreign aid' is only 1% of GDP or any other bogus statistics or numbers someone wants to pull out of their ass to justify any of the previously mentioned misappropriations of our SS funds(or my tax dollars in general).

Fuck you all very much.

One more thing, put all the Federal employees and especially the politicians back into SS and everything else We the People have to deal with and take away their special retirement/health care plans. Then we'll see more serious discussion about 'fixing' SS and Medicare/Medicaid problems. As long as they have their separate and special plans those in charge do not give a real damn about what the 'little people' face with SS/Medicare.

It is impossible to know how "real" the SocSec "problem" is without FIRST dealing with the annual trillion dollar global Pentagon,the Fed handouts to banksters, and the protections given to continue the "health care" racket.

Get your priorities straight!

BEFORE gunning for the so-called "entitlements" to the aged and infirm, ... go after the arms merchants, financial parasites, and the unholy alliance of the pharmaceutical and insurance industries.

Get your priorities straight!

Don't try "fixing" the jobs situation without dealing with the Depression caused by all the diversions, misuse and waste by out-sourced labor, militarism, 'Homeland' policing, the neo-Prohibition prison industry, and the decades-long lack of human and physical infrastructure investment.

In fact there isn't much chance of fixing anything without first dealing with the outrageous concentration of wealth and power by corrupt elite tycoons and their corporations.

(though of course if one's intention is to ignore the above, fix nothing and just continue the fleecing ...)

The article is tiresome because the word "defense" appears merely once. The word "cut" is not found in close proximity to it, either.

The issue is not one of affordability, rather the issue is prioritization of spending. Most developed nations on earth understand that pensions are a much higher priority than weapons. In the USofA, however, the mindset centers on a choice having been imposed upon us to live by the sword, come what may (I.e., death).

The article is tiresome because the word "defense" appears merely once. The word "cut" is not found in close proximity to it, either.

The issue is not one of affordability, rather the issue is prioritization of spending. Most developed nations on earth understand that pensions are a much higher priority than weapons. In the USofA, however, the mindset centers on a choice having been imposed upon us to live by the sword, come what may (I.e., death).